* Euro drops after Euro zone PMI surveys
* Investors also wary ahead of Italian election
* Dollar index at three-month high after Fed minutes
By Anirban Nag
LONDON, Feb 21 The euro hit a six-week low
against the dollar and fell more than 1 percent against the yen
on Thursday, hurt by fresh evidence the euro zone economy is
Expectations the U.S. Federal Reserve may stop providing
monetary stimulus also helped the dollar gain broadly, while
uncertainty ahead of an Italian general election on the weekend
also made investors wary of buying the single currency.
The euro dropped around 0.8 percent to $1.31675, its
lowest level since Jan. 10, and well below a 15-month peak of
$1.3711 reached on Feb. 1.
It has now broken below support at $1.3310, the 38.2 percent
retracement of its November-February rally, and its 55-day
moving average at $1.3285. The losses leave it open for a test
of the Jan. 10 low of around $1.3040.
Against the yen, the euro fell more than 1.5 percent on the
day to 122.25 yen, its lowest level since the end of January.
"The FOMC (Federal Open Market Committee) minutes were the
biggest factor and the disappointing PMIs are giving people a
reason to be shorting the euro," said Michael Sneyd, currency
strategist at BNP Paribas.
"The Italian elections are just making investors a little
bit cautious of putting on big positions ahead of the result."
A hung parliament in Italy could trigger a sell-off in the
peripheral bond market which in turn would weigh on the euro
Despite the euro's broad weakness, BNP Paribas said the
reaction to the FOMC minutes was overdone and recommended buying
the single currency against the dollar, with a target of $1.38.
The euro extended losses on Thursday after PMI activity data
for February pointed to continued weakness in the euro zone,
keeping alive chances of an interest rate cut by the European
Central Bank in coming months.
The single currency was already under pressure against the
dollar after minutes from the Federal Reserve's January
policy-setting meeting, released on Wednesday, showed "a number
of participants" expressed concern over the risks of continued
"The French and the German PMI surveys have both knocked the
euro lower," said Peter Kinsella, currency strategist at
Commerzbank. "Combined with the Fed minutes that showed more
dissension to further monetary stimulus in the U.S. and the grim
economic reality in the euro zone, we could see a weaker euro."
DOLLAR INDEX GAINS
The Fed minutes fuelled speculation among market players the
Fed is moving closer to tightening policy, helping push the
dollar index to a five-month high of 81.508.
The index had posted its biggest one-day gain in seven
months on Wednesday.
Broad demand for the dollar helped push the U.S. currency to
a one-month high against the Swiss franc of 0.93310 francs
, and a four-month peak against the Australian dollar
As the Fed considers the eventual end of its asset buying,
the dollar stands to gain against currencies like the yen and
the British pound. Both the Bank of Japan and the Bank of
England are considering printing more money and expanding their
balance sheets, driving down the value of their currencies.
The dollar has gained more than 7 percent against the yen
while sterling lost 6 percent so far this year.
The yen has been the worst performing major currency so far
this year as investors bet on more aggressive policies from the
Bank of Japan to reflate the world's third-biggest economy.
On Thursday, the dollar took a breather from its recent
rally and was trading down 0.5 percent at 93.04 yen.
Morgan Stanley strategists said the dollar's decline was
likely to be limited around the 92.90 yen area, the low struck
on Feb. 12, and the greenback would eventually rise to test its
recent near three-year highs of around 94.50 yen.